Marriott International reported third quarter 2014 results and net income totaled $192 million, a 20 percent increase over third quarter 2013 net income, while the development pipeline grew to nearly 225,000 rooms, approximately 40 percent of which are under construction.

Diluted earnings per share (EPS) totaled $0.65, a 25 percent increase from diluted EPS in the year-ago quarter.  On July 29, 2014, the company forecasted third quarter diluted EPS of $0.59 to $0.63.

HIGHLIGHTS

• Third quarter diluted EPS totaled $0.65, a 25 percent increase over prior year results;
• North American comparable systemwide RevPAR rose 8.7 percent in the third quarter with average daily rates up 5.0 percent;
• On a constant dollar basis, worldwide comparable systemwide RevPAR rose 8.1 percent in the third quarter, including a 4.5 percent increase in average daily rate;
• Marriott repurchased 4.5 million shares of the company’s common stock for $300 million during the third quarter.  To date in October, the company repurchased 3.9 million shares for $254 million.  Year-to-date, the company repurchased 20.4 million shares for $1.2 billion;
• Comparable company-operated house profit margins increased 240 basis points in North America and 200 basis points worldwide in the third quarter;
• Adjusted for cost reimbursements, the company’s operating income margin increased to 43 percent compared to 41 percent in the year-ago quarter;
• At the end of the third quarter, the company’s worldwide development pipeline increased to nearly 225,000 rooms, including approximately 37,000 rooms approved, but not yet subject to signed contracts;
• Nearly 6,900 rooms were added during the third quarter, including over 2,200 rooms in international markets.  At quarter-end, Marriott operated or franchised over 700,000 rooms worldwide;
• Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) totaled $393 million in the quarter, a 19 percent increase over third quarter 2013 adjusted EBITDA.

Arne M. Sorenson, president and chief executive officer of Marriott International, said, “We were very pleased with results in the quarter.  Our outperformance compared to the guidance we provided in July was largely due to stronger than expected RevPAR and margin growth.  North American systemwide RevPAR rose nearly 9 percent and occupancy reached an extraordinary 77.6 percent while room rates rose 5 percent.  Group demand was particularly strong with significant last minute bookings and high attendance.  With the addition of greater corporate and leisure demand, room rates surged to record levels in many North American markets.  Worldwide systemwide RevPAR increased more than 8 percent.

“Our development pipeline grew to nearly 225,000 rooms, approximately 40 percent of which are under construction.  We’re on a record-setting pace for room signings with 80,000 to 90,000 room signings expected during 2014.  Our portfolio of luxury and lifestyle brands continues to grow in response to terrific guest feedback and great demand by owners and developers around the world.  We opened our first Moxy hotel in Milan in September.  We expect to introduce the AC Hotels brand to the U.S. in November when the first property opens in New Orleans.  Our newest EDITION hotel also arrives in the U.S. next month with the opening of the Miami EDITION and Residences. 

“For 2015, we expect North American systemwide RevPAR to increase 5 to 7 percent, 4 to 6 percent outside North America and 5 to 7 percent worldwide.  Our group booking pace for the Marriott brand for 2015 is up at a mid-single digit rate with only about 60 percent of expected group business volume booked thus far.  With continued North American demand growth expected in 2015, we believe both group and transient room rates will continue to strengthen.  And, given our strong development pipeline, we anticipate 6 to 7 percent worldwide gross room additions in 2015.”

For the 2014 third quarter, RevPAR for worldwide comparable systemwide properties increased 8.1 percent (an 8.2 percent increase using actual dollars).

In North America, comparable systemwide RevPAR increased 8.7 percent in the third quarter of 2014, including a 5.0 percent increase in average daily rate.  RevPAR for comparable systemwide North American full-service hotels (including Marriott Hotels, The Ritz-Carlton, Renaissance Hotels, Gaylord Hotels and Autograph Collection Hotels) increased 8.8 percent with a 5.1 percent increase in average daily rate.  RevPAR for comparable systemwide North American limited-service hotels (including Courtyard, Residence Inn, SpringHill Suites, TownePlace Suites and Fairfield Inn & Suites) increased 8.6 percent in the third quarter with a 4.9 percent increase in average daily rate.

International comparable systemwide RevPAR rose 5.6 percent (a 6.4 percent increase using actual dollars) in the third quarter.

Marriott added 49 new properties (6,891 rooms) to its worldwide lodging portfolio in the 2014 third quarter including the first Moxy hotel in Milan, Italy.  Seven properties (1,279 rooms) exited the system during the quarter.  At quarter-end, the company’s lodging group encompassed 4,127 properties and timeshare resorts for a total of more than 702,000 rooms.

The company’s worldwide development pipeline increased to more than 1,300 properties with nearly 225,000 rooms at quarter-end, including 255 properties with approximately 37,000 rooms approved for development, but not yet subject to signed contracts.

MARRIOTT REVENUES totaled nearly $3.5 billion in the 2014 third quarter compared to revenues of nearly $3.2 billion for the third quarter of 2013.  Base management and franchise fees totaled $381 million compared to $325 million in the year-ago quarter, an increase of 17 percent.  The year-over-year increase largely reflects higher RevPAR and new unit growth.  The company recognized $9 million of deferred base management fees related to an owner’s sale of a Courtyard portfolio, $6 million of deferred base management fees related to the performance of a limited-service portfolio and $9 million of relicensing fees in the third quarter.  In the year-ago quarter, the company recognized $2 million of deferred base management fees related to the performance of a limited-service portfolio and $3 million of relicensing fees.

Third quarter worldwide incentive management fees increased 26 percent to $67 million primarily due to strong RevPAR, house profit margin and unit growth.  Incentive management fees from North American hotels increased 78 percent to $32 million compared to $18 million in the year-ago quarter.  The company anticipates that worldwide incentive management fee revenue will increase at a high teens rate for full year 2014.  In the third quarter, 51 percent of worldwide company-managed hotels earned incentive management fees compared to 32 percent in the year-ago quarter.

Worldwide comparable company-operated house profit margins increased 200 basis points in the third quarter with higher room rates, improved productivity and solid cost controls.  House profit margins for comparable company-operated properties outside North America increased 130 basis points and North American comparable company-operated house profit margins increased 240 basis points from the year-ago quarter.

Owned, leased, and other revenue, net of direct expenses, totaled $55 million, compared to $48 million in the year-ago quarter.  Improved results reflected strong performance at several leased hotels, the addition of a property the company acquired in the fourth quarter of 2013 and the impact of the Protea portfolio acquired in the second quarter of 2014, partially offset by the impact of renovations.

GENERAL, ADMINISTRATIVE, and OTHER expenses for the 2014 third quarter totaled $172 million, a 17 percent increase compared to the year-ago quarter.  The increase in expenses for the quarter largely reflected $6 million of higher incentive compensation expenses and $4 million of net unfavorable foreign exchange rates mainly due to devaluation of the Venezuelan Bolivar.  For the first three quarters of 2014, general and administrative expenses are 2 percent higher year-over-year.

On July 29, the company estimated general and administrative expenses for the third quarter would total $160 million to $165 million.  Actual expenses in the quarter were above the range largely due to the unfavorable foreign exchange impact mentioned above and higher incentive compensation expense reflecting strong performance.

EQUITY IN EARNINGS increased $12 million in the third quarter.  The increase largely reflected deferred tax true-ups due to tax law changes affecting two international joint ventures.

Provision for Income Taxes
The provision for income taxes in the third quarter was higher than anticipated due to a $6 million non-recurring tax item.

Adjusted Earnings before Interest Expense, Taxes, Depreciation and Amortization (EBITDA)
Adjusted EBITDA totaled $393 million in the 2014 third quarter, a 19 percent increase over 2013 third quarter adjusted EBITDA of $329 million.  See page A-8 for the EBITDA calculation.

BALANCE SHEET
At the end of the third quarter, total debt was $3,528 million and cash balances totaled $150 million, compared to $3,199 million in debt and $126 million of cash at year-end 2013.

At the beginning of the fourth quarter, the company issued $400 million of Series N Senior Notes due in 2021 with a 3.1 percent interest rate coupon.  The company expects to use the net proceeds for general corporate purposes.

COMMON STOCK
Weighted average fully diluted shares outstanding used to calculate diluted EPS totaled 295.4 million in the 2014 third quarter, compared to 309.5 million in the year-ago quarter.

The company repurchased 4.5 million shares of common stock in the third quarter at a cost of $300 million.  Year-to-date through October 28, Marriott repurchased 20.4 million shares of its stock for $1.2 billion at an average price of $59.36.  The remaining share authorization as of October 28, 2014, totaled 18.9 million shares.

OUTLOOK
For the 2014 fourth quarter, the company expects comparable systemwide RevPAR on a constant dollar basis will increase 5 to 7 percent in North America, 4 to 6 percent outside North America and 5 to 7 percent worldwide.

The company anticipates gross room additions of 7 percent worldwide for the full year 2014 including the 10,016 rooms associated with the Protea acquisition.  Net of deletions, the company expects its portfolio of rooms will increase by approximately 6 percent in 2014.

The company assumes full year fee revenue could total $1,714 million to $1,724 million, growth of 11 to 12 percent over 2013 fee revenue of $1,543 million. 

For 2014, the company anticipates general, administrative and other expenses will total $654 million to $659 million, up 1 to 2 percent compared to 2013 expenses of $649 million.

Given these assumptions, 2014 diluted EPS could total $2.48 to $2.52, a 24 to 26 percent increase year-over-year.  This full year EPS outlook includes the $0.07 of unfavorable adjustments reported in the second quarter.

¹ Net of interest income

The company expects investment spending in 2014 will total approximately $800 million to $900 million, including approximately $100 million for maintenance capital spending and $193 million associated with the Protea transaction.  Investment spending also includes other capital expenditures (including property acquisitions), new mezzanine financing and mortgage notes, contract acquisition costs, and equity and other investments.  Assuming this level of investment spending, approximately $1.6 billion to $1.7 billion could be returned to shareholders through share repurchases and dividends.

Based upon the assumptions above, the company expects full year 2014 adjusted EBITDA will total $1,507 million to $1,522 million, a 14 to 15 percent increase over the 2013 full year adjusted EBITDA of $1,325 million.  See page A-9 for the adjusted EBITDA calculation.